Before applying for credit, you might be wondering, “What is a good credit score?” After all, it’s no fun to have a creditor tell you that your credit application has been denied.
Credit scores are calculated by credit scoring models that use data from consumer credit reports. Lenders may use different credit scoring models to determine your creditworthiness. However, each model has specific credit scoring ranges that indicate what type of credit rating you have – from poor to excellent.
Here’s what you need to know about the makeup of a good credit score:
Credit scores are based on your individual credit history. Lenders use those scores to determine your credit risk. There are two main types of credit scores: generic and custom.
Generic scores, such as VantageScore and FICO, help lenders assess overall credit risk. You can access your generic credit score from all three credit agencies: TransUnion, Experian, and Equifax.
Custom credit scores are created for individual lenders, such as mortgage or auto lenders, to determine credit risk.
VantageScore, a type of credit score commonly used by lenders, was developed by the three major credit bureaus: TransUnion, Experian, and Equifax. It was designed to be a highly predictive, more consistent scoring model than other models in existence, such as FICO.
The VantageScore 3.0 model ranges from 300 to 850. A “good” score is from 670 to 749. If you have scores falling in this range, you have a very strong chance of being approved for competitive credit rates.
Scores from 750 to 809 are considered “great” – and scores from 810 to 850 rank as “excellent”. If your scores fall in the great or excellent range, you will be eligible for the best interest rates and credit terms available.
Here’s more information about VantageScore 3.0:
The Fair Isaac Corporation created FICO scores. FICO scores, much like VantageScore scores, range from 350 to 850. FICO 8 is the most commonly used FICO scoring model. A FICO credit score of 670 to 739 ranks as “good".
A FICO credit score of 740 to 799 is considered “very good” – and will likely qualify you for better-than-average rate offers from lenders.
Scores from 800 to 850 rank as “excellent”. If you have scores in this range, you will be eligible for the best rates and offers from lenders.
Anytime you apply for credit, the lender or creditor will want to know, up front, how likely you are to meet your financial obligations. This includes not only traditional lenders and creditors but also landlords, cell phone providers, and insurance companies.
Credit scores are a way for lenders to see if you’ve handled credit responsibly in the past. The higher your credit score, the less of a risk you pose, whereas the lower your credit score, the more of a risk you pose.
For example, utility companies evaluate credit scores when determining whether to require a deposit in case you don’t pay your bill.
Both VantageScore and FICO weigh certain factors when calculating your credit scores. The factors and weights can vary, depending on the model used. Here’s a quick rundown of the information used in each model:
Plenty of misconceptions exist about what does and doesn’t affect your credit score. Here’s a look at some factors that don’t have any bearing on your credit score.
Even though creditors often ask you to disclose your income or assets when you apply for credit, neither affects your credit score. What does factor into your credit score is whether you use your income to pay your obligations on time.
Your credit score isn’t based on whether you’re married or not. Your credit is your own. The only situation in which both your and your spouse’s credit scores would be equally affected is if you took out a joint loan together.
Where you hang your hat doesn’t matter. As long as you live in the U.S., the same credit scoring models will apply.
Even though your birthdate is included on your credit report, it doesn’t factor into your credit score. It stands to reason that if you consistently handle credit responsibly, your score should improve as you age.
However, age isn’t a determining factor in the strength of your credit score: You can have good or lousy credit no matter how old (or young) you are.
The moment you start using credit, you’re beginning to create the foundation of your credit score.
If you don’t have a credit score, the first thing you need to do is start creating your credit profile. If you apply for a credit card or loan and get declined, here are some other options:
If you have a relative or close friend with good credit, you might be able to get them to add you as an authorized user to one of their credit card accounts. This is known as piggybacking.
Some lenders will grant you a loan if you have a person with good credit who is willing to cosign the loan with you. Keep in mind that the cosigner is putting their credit on the line. They will be responsible for making the loan payments if you fail to do so.
You can use a secured credit card in the same way that you use an unsecured card. The only difference is that you must make a cash deposit with the creditor to begin using the card.
The deposit is usually in the same amount as the credit limit on your card — just in case you don’t make your payment. That way, any balance you charge is “secured” because the creditor already has the money in hand.
Instead of drawing payments from your deposit for any charges you make, the creditor will expect you to make timely payments in the amount required.
After a certain length of responsible credit behavior on your part, the creditor might offer you the option of converting the account to an unsecured version, and may also provide you with a regular credit card account.
If you’ve had some credit mishaps and your credit score is at the lower end of the scoring range, you can:
According to Federal law, you can get one free copy of your credit report from each of the three credit bureaus each year. Keep in mind that your credit reports do not show your credit scores. You may want to sign up for a product that provides your credit scores and reports, monitors your credit, and alerts you to changes or unauthorized activity.
Read over your credit report carefully to pinpoint the source of your credit woes. It might be that you’ve had several late payments, or maybe your low score is due to an undetected error on your credit report.
For example, although you might have had delinquent accounts in the past, after seven years, those delinquencies should fall off your credit reports. If you spot any of these, contact the related credit bureau and find out what you need to do to get them removed.
Focus your efforts on positive credit habits. Here are some ideas:
Also, try to funnel some money into an emergency fund each pay period. If you save $50 to $100 per month, you could have $300 to $600 in just six months. A few hundred dollars could keep you from running up your credit balances in an emergency.
Although you might be tempted to close accounts that you’ve paid off, don’t. It’s often better to leave them open, so each account’s balance-to-limit ratio will continue to be used in the calculation of your credit score.
Wait until your current credit has improved before applying for new credit. New credit can indeed be reported to your credit report. But you don’t want to overwhelm yourself with the responsibility of keeping up with a new account while you’re still trying to pay off old balances or straighten out credit report errors.
Not everything you hear about credit scores is true, but here are some facts you can count on.
Now that you know what a good credit score is, it’s smart to review your credit scores and reports regularly. This is true even if you currently have a favorable score. Your scores change as new information is reported by your creditors, the good, the bad, and even the inaccurate.
Monitoring your credit can help you stay on top of any changes or errors. What do you think? Are you ready to start actively monitoring your credit?